Thursday, 20 March 2014

United Overseas Bank

UOBKayhian on 20 Mar 2014

FY12 PB (x): 1.4
FY13 PB (x): 1.3

UOB Indonesia was formed through the merger of UOB Indonesia and UOB Buana in 2010. UOB Indonesia is well known for its focus on SMEs. It also has a corporate banking business, which offers treasury and cash management services. It specialises in providing trade-related products and services for its SME and corporate customers. A premier SME bank. UOB Indonesia derives 87.5% of its total loans from the Corporate & Institutional Banking segment. Segmentation for Corporate & Institutional Banking is granular. SMEs with loan quantum of below Rp1.5t are classified under Business Banking. SMEs with loan quantum from Rp1.5t to Rp5t are classified under Commercial Banking. SMEs accounted for 76.2% of loans for Corporate & Institutional Banking. UOB Indonesia’s personal banking business is small and comprises mainly mortgages (72.1% of personal banking loans). It partners prominent developers, such as Alam Sutera, Ciputra Group, Summarecon Agung, Agung Podomoro Land and Keppel Land, to provide mortgages to home buyers.

Working to improve productivity at branches. UOB Indonesia has 213 branches (41 branches and 172 sub-branches) and 173 ATMs across 30 cities. There are no plans to increase the number of branches. Management intends to rationalise and reposition its branch network to improve productivity. It is interesting to note that the limited number of ATMs indicates that some branches do not have ATMs. Cost-to-income ratio (CIR) was largely unchanged over the past five years and stood at 60.8% in 2013. Net interest income accounted for 70.2% of total income in 2013 (OCBC NISP: 78.1%) due to attractive net interest margin (NIM) of 4.7%. UOB Indonesia has higher NIM (OCBC NISP: 4.1%) due to its focus on SMEs. According to management, the bulk of non-interest income comes from loans, trade finance and treasury products. Weak deposit franchise. Blended loan-to-deposit ratio (LDR) has improved from 95.6% to 89.8%, with customer deposits expanding 23.6% in 2013. Unfortunately, UOB Indonesia’s CASA (low-cost funds) ratio was only 26% (OCBC NISP: 45%). It plans to invest in a cash management system and internet banking to gather current accounts from SME and corporate customers, thus improving its CASA ratio. Pressure on margins. UOB Indonesia has experienced margin pressure over the past six months as interest rates rise. NIM has compressed by 60bp to 4.69% in 2013 as deposit rates rose faster than lending rates. UOB Indonesia targets to achieve loan growth of 21% in 2014, driven by SMEs. Management expects NIM to be lower but foresees a slight improvement in CIR.

Stable contribution from Indonesia. Contribution from UOB Indonesia has stayed relatively unchanged at 5% of group pre-tax profit over the past five years. UOB Indonesia achieved 5-year compounded annual loan growth of 11.8% but CIR remained elevated 60.8%. Singapore is the mainstay, contributing 60.9% of group pretax profit in 2013.

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